Home

Senior Loan Talking – April 4, 2024

 Time to read: Minutes
Mohamed Basma

Mohamed Basma, CFA

Managing Director, Head of Leveraged Credit

Bank building

Weekly Notables

The US loan market posted a gain this week despite some volatility in broader financial markets. The Morningstar® LSTA ® US Leveraged Loan Index (Index) returned 0.14% for the seven-day period ended April 4. The average bid price increased by 1 bp, closing out the week at 96.70.

The main driver of supply in the primary market was refinancing activity; however, LBO-related deals began to gain traction once again. Borrowers are taking advantage of market technicals by repricing their debt. For context, 19% of the outstanding loan market has already been repriced, repaid or extended this year. Looking at the forward calendar, net of the anticipated $11.6 billion of repayments not associated with the forward pipeline, the amount of new supply expected to enter the market is about $5.5 billion, versus $5.3 billion in the prior weekly estimate.

The trading levels in the secondary market remained generally firm. In terms of performance, CCCs are showing signs of decompression, posting a return of -0.66%. In contrast, Single-Bs and Double-Bs gained 0.22% and 0.19%, respectively.

CLO issuance continued at a healthy pace, as managers priced six new deals during the week (including a new deal from Voya), pushing the YTD tally to roughly $50.3 billion. Morningstar reported an inflow of $641 million into retail loan funds for the week ended April 3.

There was one default (ConvergeOne) in the Index during the week.

Average Bid
April 1, 2020 to April 4, 2024
Average Bid
Average 3-YR Call Secondary Spreads1,2
March 1, 2020 to March 31, 2024
Average 3-YR Call Secondary Spreads1,2
Lagging 12 Month Default Rate3
April 1, 2020 to April 4, 2024
Lagging 12 Month Default Rate 3
Index Stats
Index Stats

Source:  Pitchbook Data, Inc./LCD, Morningstar ® LSTA ® Leveraged Loan Index. Additional footnotes and disclosures on back page. Past performance is no guarantee of future results. Investors cannot invest directly in the Index. *The Index’s average nominal spread calculation includes the benefit of base rate floors (where applicable).

 

Monthly Recap: March 2024

The loan market underperformed other fixed income asset classes this month, as spread levels for investment grade and high yield bonds continued to reach new cycle lows amidst volatile treasury yields. The loan Index returned 0.85% in March, behind the investment grade and high yield markets, which posted returns of 1.18% (Morningstar US Corporate Bond) and 1.19% (Morningstar US High-Yield Bond TR USD), respectively. The Index average bid price closed out the month at 96.73. Turning to performance in the secondary market, CCC loans were in the lead with a return of 1.01%, followed by Single-Bs and Double-Bs at 0.87% and 0.80%, respectively.

 

In the primary market, opportunistic deals gained momentum; surpassing February levels as secondary prices rallied. We are now seeing some refinancing transactions for cap structures that were previously financed in the private credit markets, reversing last year’s trend. Loans priced at par and above experienced a notable increase from 21% in February to 39% by the end of March. Total refinancing volume increased to $21 billion from $19.8 billion in February. Meanwhile, repricing activity picked up as well this month, reaching a total of $55 billion (the second highest volume in the past three years). However, the size of the Index declined by $11 billion this month, to $1.39 trillion (reversing the gains in February), as M&A activity remains low.

 

In terms of demand, CLO issuance moderated to $15.5 billion from $20.7 billion last month. On a YTD basis, CLO volume is currently tracking $48.8 billion across 106 new deals (up 45% from last year's volume), given the liability spread tightening this quarter. In addition, retail loan funds saw the largest monthly inflow since April 2022 at $2.1 billion, bringing YTD net flows to $2.9 billion.

 

There was one default (Jo-Ann Stores) in the Index during the month. The trailing 12-month default rate by principal amount decreased to 114 bp from 141 bp in February.

 

 

Index Stats as of March 31, 2024
Index Stats as of March 31, 2024

Source:  Pitchbook Data, Inc./LCD, Morningstar ® LSTA ® Leveraged Loan Index. Additional footnotes and disclosures on back page. Past performance is no guarantee of future results. Investors cannot invest directly in the Index. *The Index’s average nominal spread calculation includes the benefit of base rate floors (where applicable).

 

Tags:
Investment Insights
3493993

Unless otherwise noted, the source for all data in this report is Pitchbook Data, Inc/LCD.  Pitchbook Data/LCD does not make any representations or warranties as to the completeness, accuracy or sufficiency of the data in this report.

1.Assumes 3 Year Maturity. Three-year maturity assumption: (i) all loans pay off at par in 3 years, (ii) discount from par is amortized evenly over the 3 years as additional spread, and (iii) no other principal payments during the 3 years. Discounted spread is calculated based upon the current bid price, not on par. Please note that Index yield data is only available on a lagging basis, thus the data demonstrated is as of March 31, 2024.

2. Excludes facilities that are currently in default.

3. Issuer default rate is calculated as the number of defaults over the last twelve months divided by the number of issuers in the Index at the beginning of the twelve-month period. Principal default rate is calculated as the amount defaulted over the last twelve months divided by the amount outstanding at the beginning of the twelve-month period.

General Risks for Floating Rate Senior Loans: Floating rate senior loans involve certain risks.  Below investment grade assets carry a higher than normal risk that borrowers may default in the timely payment of principal and interest on their loans, which would likely cause the value of the investment to decrease.  Changes in short-term market interest rates will directly affect the yield on investments in floating rate senior loans.  If such rates fall,  the investment’s yield will also fall.  If interest rate spreads on loans decline in general, the yield on such loans will fall and the value of such loans may decrease.  When short-term market interest rates rise, because of the lag between changes in such short-term rates and the resetting of the floating rates on senior loans, the impact of rising rates will be delayed to the extent of such lag.  Because of the limited secondary market for floating rate senior loans, the ability to sell these loans in a timely fashion and/or at a favorable price may be limited.  An increase or decrease in the demand for loans may adversely affect the loans.

This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) changes in laws and regulations and (4) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors.  

Top